Apple's App Store revenue on track to surpass iTunes Store by the end of this year

As sales of of music and videos from the iTunes Store decline, Apple's App Store continues to grow, and is on pace to account for most of the company's online services revenue by the end of this year.

New data released on Wednesday by Morgan Stanley obtained by AppleInsider estimates that last quarter the App Store was 41 percent of Apple's services revenue, while iTunes accounted for the remaining 59 percent. But that balance of power is expected to shift, and quickly.

Analyst Katy Huberty projects that by the fourth quarter of calendar 2014, the App Store will represent 53 percent of Apple's online services revenue. That would leave the iTunes Store with a 47 percent share --?a number that she expects will continue to shrink as music sales decline.

Morgan Stanley's research suggests that iTunes Store customers are simply spending less than they used to. Huberty believes those dollars are now going toward competing content providers including Spotify, Pandora and Netflix, as users opt for recurring payments to access content rather than purchasing specific songs or videos.

But while iTunes Store shoppers have been spending less on content, users have been spending more on downloadable software on the App Store. Morgan Stanley's data suggests that the App Store passed the iTunes Store in average billings per user in late 2012, and the disparity between the two has only increased since.

Huberty said that Apple's online services are underappreciated by investors because they accounted for less than 6 percent of the company's revenue over the last 12 months. And while monetization of online services is declining --?down 24 percent year over year in the first quarter of 2014 -- Huberty sees upside in the strength of Apple's App Store.

Specifically, she noted that the iTunes Store is estimated to have about 15 percent operating margin, while the App Store has much higher estimated margins around 46 percent. She believes that the growth of the App Store and its strong margins could add 10 basis points to Apple's total company-wide operating margins for calendar 2014.

Looking forward, Huberty also sees potential for future catalysts in the online services realm, with the possibility of a subscription streaming music service chief on her list. Some believe that the Beats Audio service could play an integral role for Apple's services revenue, if the rumored acquisition of Beats Electronics comes to pass.

Beyond music and content, Huberty believes Apple could enter the mobile payments space to further monetize its 800 million active iTunes accounts. And she sees a rumored "iWatch" as another potential platform where Apple could offer an App Store and take a cut of sales.

It would be brilliant if Apple could offer some sort of iTunes monthly or annual subscription, with the option to stream or download any content available in iTunes. I have no idea what they'd charge or whether or not it's viable compared to the current model. If Apple offered me the chance to watch any film or TV show whenever I want or listen to any track currently sold, I'd jump at it. Maybe I'm being too idealistic?

Apple can buy ad space on AI any time they want to, but they don’t. Why? I don’t know. Should AI just refuse any competitor’s ad dollars and start a subscription service to keep the lights on? Would you pay to read AI?

Apple can buy ad space on AI any time they want to, but they don’t. Why? I don’t know. Should AI just refuse any competitor’s ad dollars and start a subscription service to keep the lights on? Would you pay to read AI?

I think some of the ads are more based on your habits and demographics, because I don't see any Microsoft ads and I see ads from local companies that are specific to my area and from companies that aren't even related to computers from companies that I buy products from.

I don't doubt the numbers at all. App Store has been rather successful on both platforms. As for iTunes, let's face it they haven't been paying attention! When was the last time you saw an iPod advertisement which is by the way also an iTunes add?

Based on the data reported each iTunes customer spent on average $3.29 each last quarter, which is down 24% YOY. On the other hand the App Store is steadily increasing it's revenue. Yeah, at some point the App Store will surpass iTunes if nothing changes. Of course there's rumors of iTunes being offered to Android which could change the outlook.

I think some of the ads are more based on your habits and demographics, because I don't see any Microsoft ads and I see ads from local companies that are specific to my area and from companies that aren't even related to computers from companies that I buy products from.

So where did Katy get these numbers? Did Apple release them or is she just making them up like all the other analysts and their "estimates"? Unless I get info directly from Apple I'm not believing any if this garbage.

So where did Katy get these numbers? Did Apple release them or is she just making them up like all the other analysts and their "estimates"? Unless I get info directly from Apple I'm not believing any if this garbage.

Based on the data reported each iTunes customer spent on average $3.29 each last quarter, which is down 24% YOY. On the other hand the App Store is steadily increasing it's revenue. Yeah, at some point the App Store will surpass iTunes if nothing changes. Of course there's rumors of iTunes being offered to Android which could change the outlook.

I guess this is where Beats come into the picture. I suspect music subscription is the way forward, for better or worse. I still buy music but only because I don't subscribe to a streaming service.

Apple can buy ad space on AI any time they want to, but they don’t. Why? I don’t know. Should AI just refuse any competitor’s ad dollars and start a subscription service to keep the lights on? Would you pay to read AI?

I never said AI should not give space to MS. I just said the tango orange color is hurting my eyes. :D

Based on the data reported each iTunes customer spent on average $3.29 each last quarter, which is down 24% YOY. On the other hand the App Store is steadily increasing it's revenue. Yeah, at some point the App Store will surpass iTunes if nothing changes. Of course there's rumors of iTunes being offered to Android which could change the outlook.

When you think how tiny that figure is—$13 a year, it makes you wonder how many people would pay for a music subscription service. Even one at $50 a year would be way more than most people spend. Maybe they'll incorporate it into iTunes Match.

"If the young are not initiated into the village, they will burn it down just to feel its warmth."- African proverb

Apple can buy ad space on AI any time they want to, but they don’t. Why? I don’t know. Should AI just refuse any competitor’s ad dollars and start a subscription service to keep the lights on? Would you pay to read AI?

AI uses iAds in their iOS app.

"If the young are not initiated into the village, they will burn it down just to feel its warmth."- African proverb

Morgan Stanley's data suggests that the App Store passed the iTunes Store in average billings per user in late 2012, and the disparity between the two has only increased since.

It's also important to take into consideration the revenue breakdown of each though. The top 25 developers take in half the App Store revenue and the vast majority from in-app purchases. The most popular musicians should take in more revenue but I wouldn't expect it to be weighted so heavily towards so few. Let's say there's a shortage of apps like Candy Crush to milk in-app purchases to keep playing, the App Store revenue would fall drastically. Unlike the music offerings, there's not a wide variety of apps people want to pay for. Over 90% of App Store revenue is from in-app purchases so people aren't buying apps, they are buying things inside apps.

Pandora is one of the top 25 revenue earners too so clearly Apple having a competitive subscription music service will shift the revenue some way back towards the music side but further cannibalize the individual purchases. It's better they do this themselves than the likes of Pandora however.

Good observation. There's very little in the iTunes Store that is free, unlike the App Store. And didn't we recently hear that a large chunk of the revenue is from a few players in games that use IAPs?

I find the figure of $13 per user per year for the iTunes Store suspect - it seems so low!

In an ideal world, Apple will be able to encourage people to spend more on music each year to help revitalise the music industry.

"If the young are not initiated into the village, they will burn it down just to feel its warmth."- African proverb

Good observation. There's very little in the iTunes Store that is free, unlike the App Store. And didn't we recently hear that a large chunk of the revenue is from a few players in games that use IAPs?

Yeah, for some reason free-to-play has taken off in a big way and not just in mobile. League of Legends is a desktop example, which made over $0.6b last year.

$1.88b in 2013 but not all from iOS. That game alone will contribute 1/10th-1/20th of Apple's entire App Store revenue.

The Angry Birds devs didn't go free-to-play originally but switched to it with their racing game. They're all just chasing money now rather than making good games.

Radio is kind of like this model where you listen to music and then try to monetize people in a variety of ways either through ad impressions or subscriptions.

Quote:

Originally Posted by Benjamin Frost

I find the figure of $13 per user per year for the iTunes Store suspect - it seems so low!

It will average over a lot of people who are barely buying any music. There's no distinction between an account for buying on iTunes and one for buying on the App Store so they'd just take however many hundredd million users and split the estimated revenue between them. It could end up being the case that only a fraction of the accounts are buying music in which case the amount per user would be a lot higher.

Good observation. There's very little in the iTunes Store that is free, unlike the App Store. And didn't we recently hear that a large chunk of the revenue is from a few players in games that use IAPs?

Yeah, for some reason free-to-play has taken off in a big way and not just in mobile. League of Legends is a desktop example, which made over $0.6b last year.

$1.88b in 2013 but not all from iOS. That game alone will contribute 1/10th-1/20th of Apple's entire App Store revenue.

The Angry Birds devs didn't go free-to-play originally but switched to it with their racing game. They're all just chasing money now rather than making good games.

Radio is kind of like this model where you listen to music and then try to monetize people in a variety of ways either through ad impressions or subscriptions.

Quote:

Originally Posted by Benjamin Frost

I find the figure of $13 per user per year for the iTunes Store suspect - it seems so low!

It will average over a lot of people who are barely buying any music. There's no distinction between an account for buying on iTunes and one for buying on the App Store so they'd just take however many hundredd million users and split the estimated revenue between them. It could end up being the case that only a fraction of the accounts are buying music in which case the amount per user would be a lot higher.

Apple must be wondering when the gold rush of IAPs will end. Perhaps it will flourish. But it's a real phenomenon - crazy!

Your point about music seems likely to me. I wouldn't be surprised if there were swathes of people who never bought anything on iTunes.

"If the young are not initiated into the village, they will burn it down just to feel its warmth."- African proverb